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What Is Open Interest And What Does It Tell Us?

Open interest, the total number of open contracts on a security, applies primarily to the futures market. Traders often look to the open interest of various contracts to gauge market sentiment, interest, and liquidity. An increase in open interest along with an increase in price is said to confirm an upward trend, while an increase in open interest along with a decrease in price confirms a downward trend.

How Can Traders Use Open Interest?

Technical traders can use open interest to look for trends and momentum opportunities and to confirm market timing on trades. They can look for rising open interest in a bullish market, and flattening open interest in a bearish market. By paying attention to open interest, traders can make better trades and spot trend reversals.

Rules Of Open Interest

Futures traders must understand and remember the rules of open interest. If prices are rising and open interest is increasing, it’s a bullish sign. If the open interest numbers flatten following a rising trend in both price and open interest, it’s a warning sign of an impending top. Traders should also look for high open interest at market tops as a bearish signal. Additionally, rising prices and a decline in open interest are bearish, and a decline in both price and open interest indicates liquidation.

In conclusion, open interest is a valuable tool for traders in the futures market. By understanding and paying attention to it, traders can gain insight into market sentiment, confirm trends, and make better trades.

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